If you live in Australia as a temporary resident, for example if you’re holding a 457 visa, you are probably aware of the LAFHA changes recently announced by the Australian Treasury.

A few months ago we wrote about this Australian “tax break”. In What is LAFHA? Mum explained that LAFHA is a tax exemption that Australians and overseas temporary residents claim if they have relocated in order to fulfil employment. We mentioned that LAFHA isn’t a sum of money paid directly to employees who relocate for work. It is a sum of money that individuals use to reduce their taxable income.

If an employer covers the cost of accommodation and food costs whilst an employee is working away from home, LAFHA permits them to include these costs in their salary package as tax free income; this reduces their overall tax liability. They pay less tax and have a higher monthly income. According to LAFHA.com.au individuals can be around $9,400 better off a year, many families receive more.

Breaking news – changes to LAFHA

On 29th November, the Australian Government announced a Fringe Benefits Tax Reform that includes changes to LAFHA. In the Treasurer’s media release they state that; “access to the tax exemption for temporary residents will be limited to those who maintain a residence for their own use in Australia, which they are living away from for work purposes, such as ‘fly-in fly-out’ workers.”

Currently, overseas workers living in Australia as temporary residents claim LAFHA. The press release doesn’t explicitly say that these people will no longer receive the tax exemption but in describing who WILL be eligible to receive LAFHA it’s clear that overseas temporary residents no longer fit the criteria.

More about the LAFHA reforms

A consultation document released to LAFHA agents by The Australian Government the Treasury has the same tone. There are some important paragraphs that make the intentions of the reform clearer than the press release.

Firstly, the intended use of LAFHA is clearly outlined: “The LAFHA benefits are intended to compensate employees for additional costs they incur when they are temporarily relocated by their employer for work.” The document says; “These tax concessions have been subject to growing exploitation…temporary resident employees who are not genuinely living away from an Australian home receive the benefits.” The consultation document talks about creating a level playing field between local and overseas workers.

One of the most important paragraphs we read, under the heading “How LAFHA benefits will be taxed in the future” states;

“Temporary resident employees will be required to maintain a home for their own use in Australia (which they are living away from for work) to access the concession, and in those cases the expenses will need to be substantiated.”

The same idea is confirmed here;

“Temporary residents who maintain a home in Australia for their own use and who are required to live away from that home to perform the duties of their employment will be able to claim an income tax deduction for their actual expenses. Allowances for other temporary residents will be taxed like other forms of income under the income tax system.”

Overseas temporary residents, who don’t have an Australian home that they are living away from, can still receive an accommodation and food payment from their employer but they will be taxed on it as if it’s additional income (i.e. they pay Fringe Benefit Tax (FBT)). For most individuals and families who claim LAFHA this means a significant decrease in their monthly income.

LAFHA Reform Examples

In the Treasury’s consultation paper two examples are provided that we feel represent the most likely scenarios for our readers.

“Steve comes to Australia as a temporary resident to work in the information technology sector for two years. He lives and works in Sydney. His employer reimburses his living expenses while in Australia. Steve’s employer is subject to FBT on the accommodation and food benefits provided to Steve.”

“Fiona comes to Australia as a temporary resident working for an international firm. She is paid LAFHA for the duration of her three year contract. She lives and works in Melbourne. She will have the LAFHA included in her assessable income. She will not be able to claim a deduction for any expenses incurred from living away from home.”

LAFHA changes timeline

As we have mentioned, a consultation paper has been circulated to LAFHA agents and other interested parties. The closing date for responses is 3rd February 2012. The reform will need to be approved by parliament before being implemented – the proposed implementation date is 1st July 2012. LAFHA.com.au includes a detailed response to the changes here.

Are the changes fair?

At the risk of sounding like we’re having a toddler tantrum we started to question how fair the proposed changes are for overseas temporary residents.

On the one hand it is obvious that the way LAFHA has evolved is not as it was intended. Clearly Australian workers living away from home and maintaining an empty home whilst they are working elsewhere should be compensated. The position of an overseas worker, who may own property elsewhere in the world but is probably covering the costs with rent, isn’t the same as a local living away from home.

However, we can also understand why temporary residents may be feeling hard done by. Typically, Australian temporary residents are not eligible for Medicare and they don’t get Family Assistance to help with the cost of childcare. Depending where they live in Australia, Temporary Residents pay annual school fees for their children to attend Government Public Schools e.g. $4,500 per year per child in a NSW Primary School, we have written about government school fees throughout Australia here.

LAFHA seems to have evolved into a form of financial compensation for temporary residents, particularly those with children, who have far more out of pocket expenses than Permanent Residents or Australian Citizens. Unless employers routinely pay them more, how will they survive?

If Temporary Residents earn the same and are taxed the same as Permanent Residents and Australian citizens for the duration of their time here, shouldn’t they have access to the same services i.e. healthcare and schooling? Or is there more to it than this?

Are you affected by the proposed LAFHA reform? We’d love to hear your views. We’ll also send a link to this article and your comments to the Treasurer’s media centre so they can hear what you have to say. Thank you.

P.S. If any financial or migration experts would like to add their comments and views on LAFHA and the proposed changes we’d love to hear from you. Thank you too.

We heard about this change less than 1 month after my boyfriend had signed his contract to move to Australia. We are now looking at about $1150 less per month in pay. This is extremely hard and we will have to reconsider coming

Sorry to hear that Nique, keep an eye on the news. The reform hasn’t been agreed by parliament yet, there may still be scope for another solution for temporary residents. Have you discussed the possible change with your employer? We’re interested to hear what employers are saying.

No, so far al the employers have said is that this is change not approved yet and that we will have to wait and see what really happens. This uncertainty makes it even worse, because we are looking into other options now without knowing how to compare them to coming to AUS.

Thanks for the update. It would be something if the Treasury said that people with existing contracts (work or property) could keep things the same until the end of the contract and until they’ve had time to seek alternative solutions and financial compensation from their employer.

Hi
I’m 2 years into a 457 visa, working for an international firm. I do not get LAFHA due to company policy and we have consequently struggled to make ends meet, living in a high rent area in Northern Beaches. We’re wondering whether the experts feel there may be a down shift in rental costs in areas where many expats live? We need to sign up for a new lease in the new year and may cut this short due to potential savings. Do you know of any expert commentary / analysis on the impact of rent / house prices?

Hi Richard,
Thank you for your comment. Could you confirm that your question relates to the impact the LAFHA changes will have on rental property prices \ demand for high-end property in Australia? Particularly expensive cities like Sydney? It’s an interesting point…
Whilst I was searching for expert comments I came across this interesting article from Moore Stephens (Accountants), the comments made in the article are similar to ours. I’m going to keep hunting for an expert to share their views. If you are a property expert please feel free to jump in…

Might well see a drop Richard I am seeing small indications in areas like Mosman but that may also be the financial situation in general. i have been surprised to see a few “bargains” ( not sure you can really call them this!!!) especially in apartments.I think tenants may be more inclined to negociate price for a good tenant and a 12 month lease

Hi Liam, Thank you for your comment – As you have stressed, it is the Fringe Benefits Tax exemption that is being removed. Depending on the salary bracket that individuals are in, they will lose 30% – 45% of the accommodation \ food allowance (LAFHA) that their employer pays. At least, that’s my non-expert interpretation – if we have LAFHA or tax experts lurking here, please feel free to step in!

I am very worried about this. My husband earns a decent salary of $90k, however, living in Sydney this does not go very far. We have 3 children. There will not be enough money to send all 3 to school if we lose our LAFHA. I will have to homeschool our twins. This is not ideal as the whole point of school is for social interaction. I am infuriated that they think we are abusing the system. Australian residents get child benefit and dont have to pay for school. If they are going to take away our LAFHA then we should at least be entitled to free schooling. Coming from the UK every child is entitled to free schooling – even foreign children. Why should our kids be penalised over here? People on a 457 visa are skilled, educated people who contribute to society in many ways. I give blood every 3 months and I have just volunteered to be an ethics teacher at my local school. We are valued members of society that are here to help YOUR country grow. Dont force us to leave.

Hi Melanie, Thanks for your comment, I really sympathise with your situation. Regarding school fees, it’s depressing that Sydney is one of the most expensive places to live and yet NSW is one of the only states that continues to enforce school fees. Many other organisations at least offer sibling discounts or a family fee rather than per child. Before the end of the consultation period (February) I am going to send all our article and Facebook comments to the Treasury…I believe you can contact them direct too. There is a direct email address in the LAFHA reform consultation document, publicly available if you do a search on their website: http://www.treasury.gov.au.

melanie I feel for you and this is a very worrying subject. I agree with sarah this school fee in NSW is distressing and we come across it so very often which is why we emphasise it in our printables. i am finding a lot of companies now just agreeing to pay school fees its one less worry
BTW we have just begun ethics classes in some schools here so you should make enquires although some far right MPs want to see them go.http://www.ethics.org.au/content/ethics-based-complement-to-scripture
Give all your blood now as anyone who has lived in UK for a period of 6 months or longer
between 1980 and 1996 cannot donate due to mad cow disease ( this is also true if you donate in USA!) Don’t take it personally its the same for me and Sarah!
Despite all this we would love you to come and I wish you well with the decisions you have to make

Whilst the LAFHA benefit has evolved from its intended purpose one can argue that the evolution of this benefit helps to alleviate the current Australian need for skilled labour. By virtue of there being a skill shortage list of occupations there is still a need for skilled migration. Skilled migrants often have families and are entitled to family related benefits and free schooling. They may also be incurring home based costs of upkeep on their home property. When agreeing to work in Australia these benefits are forfeited often in return for a decent salary to cover extra expenses. LAFHA helps redress the balance. Remove it and the benefits of the move are less positive, and the simple fact is skilled people may not come and those already here may be forced to leave. Surely the cost of the benefit is minimal in comparison value add on the Australian economy?
By all means abuse of any allowance, as has been reported in the press, should be stopped however a broad sweep removal will cause more damage than good.

Hi there. Kitty makes a great comment and I relate to what she is saying. I don’t think LAFHA should be removed; however, I’m all in favour of penalising those who abuse it. I’m an experienced specialist working in the services industry for which there is a very high demand globally, specially in Australia. I found Australia to be too expensive for the kind of life I could easily be leading in other first world countries. LAFHA was a blessing to me and I decided to hang on for a couple of years until I could earn high enough wages to do without the LAFHA and apply for the PR. If the LAFHA is removed I’ll be forced to leave Australia. I might be wrong, but I assume that that would be the mindset of a lot of skilled migrants and Australia could potentially end up losing many of them. I have an affinity towards Australia and want to be a productive member of its society whilst living the kind of life I desire. I’m sure I’m not the only migrant feeling this way. Oh well, here’s to hoping for the best.

Your commentHey all. I totally agree with Daniel and the other comments made. In my case the impact will not be too bad comparing with other as I am living on my own, so no costs with school for children etc but, i can confess the impact of the LAFHA changes will be negative for me as well. I am currently on a 457 for 2 years and the LAFHA changes will be effective 1 month before my contract expire. I perform a specialized service that is very hard to find professionals in Australia. Well, I still don´t know if i should extend or not my contract. Sydney is a very expensive city and I am afraid I will have to move to another suburb far from the city to reduce the huge expenses with rental I am currenlty having or even look for another opportunity in another country.
Like was said, we are here to grow and “help the country to grow” as well. Would be a shame to see lots of good professionals leaving the country.

Hi Mariano,
Thank you for your comment, I sympathise with your (and others) position. On Monday I’m going to email the Treasurer all the comments we’ve received. If anyone else would like to share their thoughts and experiences please do. Thank you.

Ex pats considering a move to Australia are definitely rethinking it. Australia’s quality of life is only higher if people coming into the country with a salary that can give them an equitable standard of living, which means that employers would have to spend a lot more covering the higher costs of goods and services (e.g., medical, housing, utilities, food, school, child care). For AUS citizens, Most of these expenses are covered or subsidized by the AUS government. This puts high-skilled ex pats and domestic employers at a significant disadvantage. Other Asia-Pacific countries have no surpassed Australia in the quality of life when taking cost of loving into the equation. Don’t let Australia fall behind, especially when the global economy continues to struggle and Australia’s economy–which is heavily dependent on the mining industry, and is in of itself a deep concern–begins to slow.

For us it’s a point about being seen as ‘the same’ as Australians which is a point made by the government when looking to scrap the lafha. If they want us to be classed as the same then everything needs to be the same i.e. we pay the same tax and receive the same benefits.

We will be about $500-700 worse off a month but will also need to find $9000 a year in school fees and to be honest we really can’t afford both. If they remove it completely and we don’t get an increase in salary (which would need to be about 15k increase) then we would seriously need to look at whether we stay here or not. Having only been here less than a year we would be looking at repaying some of the relocation package that brought us here so quite depressing really but although we did come here for the liefstyle we didn’t come to be considerably poorer than we were in the UK.

It seems ok to class us as non residents when it comes to health, school, taxes but then class us as ‘the same as everyone else’ when it comes to lafha.

Not my favourite subject as you can tell! The same as many others lafha was part of the ‘package’ sold to encourage us to come here and the company are waiting to see the outcome but are making no promises.

Hi Sarah,
Thank you for taking the time to comment. Interesting to hear your perspective. If the LAFHA change is implemented I hope it is accompanied by other changes, either regarding school fees or assistance with health and childcare, that go some way to compensating.

I have discovered few days ago that my wife is pregnant. We are in e457 with Working Visa Hospital and Medical Insurance since more that 12 months. We asked about pregnancy cover and if we go private we must pay out-of-packet $7,000 obstetrician and $XX,000 private hospital room after delivery just because we are not permanent resident. If LAFHA changes I’d like to pay, at least, out-of-packet expenses as an Australian permanet resident. Also why I paid madibank (and medicare in 6 months reciprocal agreement to be sure) all this time?

Sadly I am realizing that it is very problematic and expensive to face a pregnancy in e457.

Hello, my partner has been in Australia for 4 months now and has been receiving LAFHA which really helps as everything is really expensive in Sydney. I’ve visited her once already (for 6 weeks) and I intended to move over permanently in April. However, the LAFHA changes now mean we’re in a quite a lot of uncertainty. If it gets removed then it’s likely she’ll have to come home so I’m now thinking that I’ll have to delay joining her until the changes are fully known. I don’t want to be in a situation where I quit my job in the UK and then find it’s just not economic to be in Australia. Understandably my partner is unhappy about this uncertainty that we now have to deal with. I’m sure there are many people in a similar situation.

It’s a real shame you’re in such an uncertain situation. We keep searching The Treasury website and other resources for an update and there hasn’t been any news since the consultation paper was published in Nov 11. The consultation period ended this week (3rd Feb) and the proposed implementation of the changes was 1st July. Hope they don’t leave it too long before making a decision and \ or providing an update.

WOW really worrying about this, i moved here with my family (hubby & 2 kids) in april 2011, transferred with my company and i couldn’t move here unless my company agreeded to allowing me to have the LAFHA. my youngest just started school this wk and we are struggling even with LAFHA to pay NSW school fees. Its mad. my hubby couldn’t work because he could’nt get a job earning enough money to pay the $200.00 per day child care required for both kids. and so if they take the LAFHA away from us, i think we are going to have to go back to the UK which may also mean i lose my job with the company i have been with for the past 5 yrs? VVV worried

Hi Denise, it’s a shame so many families are finding themselves under this pressure. Just to be clear…employers can still offer help to cover rent \ food, the change is that this money will be taxable where previously it wasn’t, so obviously the overall financial benefit is less. I wonder whether employers can be persuaded to offer more in order to support families through the transition, or whether the Treasury will let current arrangements be honored before implementing the change or maybe I’m being too hopeful! We’re keeping an eye on the media regarding the consultation paper and hope there will be more announcements soon.

Whilst I am sympathetic to those who will be worse off due to these changes I have to disagree with many of the statements that this change is “unfair”. I have a friend working in the UK at the moment, she earning GBP which is converting to almost nothing to the aussie dollar. On top of that, she has a property in Melbourne which she is having to pay each month on the gap between what it is renting for. I dont see the UK government offering her any compensation. I cant understand why people feel that this is their “right” to take home an extra $9000+ per annum just because they are on a 457.

Before reading this i had no idea that schooling was more expensive for ex-pats and rightly so, i would expect the Aussie government to make this more accessible to foreign workers but you need to remember that this was never the intention of LAHFA to begin with, so its probably a different, albeit related, debate.

For those who expect a mass exit of skilled workers as a result of this change I would argue that this is the best possible time for the government to introduce these changes. With the global economy looking bleak, Australia is an attractive proposition. I highly doubt we are going to lose that many people to the prospect of working for the weakened British Pound or Euro in a market with all time high unemployment.

Hi Kathy,
Thanks for your comment and for sharing your perspective. The current use of LAFHA for 457 visa holders is not as originally intended, and when compared to its intended use for fly in fly out workers maintaining a residence in Australia it doesn’t seem right that overseas temporary residents should get the benefit. However, as I mentioned in our response to the Treasury, I believe it has evolved into compensation for services that 457 visa holders pay for, that permanent residents and citizens of Australia don’t i.e. school fees and healthcare. If the Treasury want to make all things equal I feel that they should remove LAFHA for overseas temporary residents but provide them with access to Medicare and “free” Government Education – I’d be interested to know for sure but I expect Australian citizens living in the UK and most parts of Europe get access to free schooling and healthcare.
Anyway, still waiting to see what final decision is following the consultation feedback…